Opponents of pension fund bill worry it could sock N.J. taxpayers

TRENTON -- A bill racing through the Legislature would dramatically alter the pension system for police and firefighters, granting employees control over their benefits and investments but leaving taxpayers on the hook if the pension fund flops.

Indeed, opponents argue that the legislation transfers all of the decision-making, but none of the liability, to a newly created board of trustees whose membership would favor employees over gubernatorial appointees.

The bipartisan proposal, which passed the state Senate last week 37-0, would carve the Police and Firemen's Retirement System out of the government worker pension system. The police and fire pension system has more than 85,000 members who are working or retired and holds about $26 billion in assets and $11 billion in unfunded liabilities.

The bill (S3040), pushed by some police and firefighter unions, is a reaction to the state's chronic underfunding and recent underperforming investments, union leaders said.

"I'm tired of having no ability to help the system," said Patrick Colligan, president of the state Policemen's Benevolent Association. "We're in a sound system and we want to keep it sound. We're afraid of losing another percent in a market that everybody is making money in."

Union leaders criticized the state for investing too heavily in costly hedge funds. And while the fund is the state's healthiest, decades of contributing less than what was recommended by actuaries has left it billions of dollars short of what it would cost to pay for promised benefits.

Under the proposed takeover, a 12-person board would assume management of the fund from the state Division of Pensions and Benefits and control of the investments from the State Investment Council.

The board would be able to chart its own investment strategy and alter benefits and contribution levels.

Though the PFRS fund is stronger financially than the state's other public retirement funds, the investment returns have not been as strong as other union-managed funds, said Richard McGrath, a spokesman for Senate President Stephen Sweeney (D-Gloucester), a bill sponsor.

"Better returns will benefit everyone, including local government," spokesman Richard McGrath said in a statement.

But for all its appeal, the proposed model leaves taxpayers at risk if the pension fund goes south.

The board of trustees could change members' contributions to their pensions, the formula for determining payouts and retirement age. They could also enhance or cut benefits.

Should any of those changes weaken the pension fund, or should the investments post poor returns, the local governments must make up the difference, the League of Municipalities argued.

"It's the taxpayers' money that bears the risk here," said Michael Cerra, assistant executive director of the state League of Municipalities, which has urged that the board be evenly divided between beneficiary and management members. "The taxpayers should be on equal footing."

Gov. Chris Christie's pension commission recommended handing stewardship of the funds and their liabilities to willing unions as part of their sweeping benefits overhaul. But that recommendation assumed comprehensive benefits reforms and reductions, said Tom Healey, who headed Christie's Pension and Health Benefit Study Commission.

"We also assumed the taxpayers' obligations would be capped and that the employee groups would bear the investment risk and the obligation to reduce benefits if necessary to keep the plans solvent," he said.

The bill includes no such clean break. And the state and local governments that pay the employer share of the pension contributions remain responsible for ensuring there is enough money to pay for benefits, opponents said.

"My reading of the bill is that it transfers control of benefit levels to a board dominated by beneficiaries with no ultimate protections for taxpayers," said Tom Byrne, chairman of the State Investment Council and a member of Christie's benefits commission.

"In so doing, it is a radical departure from the commission's recommendation that would give unions control if any only if they took control of the liability side as well as the asset side, which is different than leaving the taxpayers ultimately holding bag."

Proponents, including the heads of the state Policemen's Benevolent Association and the Firefighters Mutual Benevolent Association say they've included safeguards in the proposal.

Beneficiary representatives would outnumber management representatives 7-5, yet the proposal increases the threshold to eight of 12 votes to set benefit levels or contributions rates higher or lower than recommended by the consulting actuary.

"That requirement means that at least one representative of government officials would have to give his or her approval," McGrath said.

And, they said, beneficiaries' first priority is to improving the stability of the fund.

The bill says "The primary obligation of the board shall be to direct policies and investments to achieve and maintain the full funding and continuation of the retirement system for the exclusive benefit of its members."

The portion funded by local governments is 74.5 percent funded, while the much smaller share funded by the state is 41.2 percent funded.